Home has a comparative advantage in wheat, and Foreign has a comparative advantage in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign produces 1,000 yards of cloth. The following table shows the amount of wheat that Home is willing to trade to acquire more cloth. If the international price of cloth is 1.5 bushels of wheat per yard, how many yards of cloth will Foreign export to Home?
A) 500 yards
B) 600 yards
C) 700 yards
D) 1,150 yards

Question

Home has a comparative advantage in wheat, and Foreign has a comparative advantage in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign produces 1,000 yards of cloth. The following table shows the amount of wheat that Home is willing to trade to acquire more cloth.  If the international price of cloth is 1.5 bushels of wheat per yard, how many yards of cloth will Foreign export to Home?
A) 500 yards 
B) 600 yards 
C) 700 yards 
D) 1,150 yards

Quizplus · Accepted Answer

If the international price of cloth is 1.5 bushels of wheat per yard, then for every yard of cloth, Home could produce 2/3 of a bushel of wheat (1 yard / 1.5 bushels = 2/3 bushel per yard). 
Therefore, for Home to be willing to trade with Foreign, the price of cloth in terms of wheat must be less than 2/3 bushel per yard. 
At a price of 1.5 bushels per yard, Home is willing to trade up to 1,000 bushels of wheat for more cloth. 
Foreign will export as much cloth as possible while still leaving enough wheat for its own consumption. 
Foreign has 500 bushels of wheat remaining after producing 1,000 yards of cloth, which is just enough to meet Home's demand for 1,000 bushels of wheat. 
Therefore, Foreign will export the remaining 500 yards of cloth to Home.

Home Has a Comparative Advantage in Wheat, and Foreign Has